Modifications to the Regulation on Infrastructure Financing and Securitization now allows for the creation of investment vehicles to finance public works projects.
These investment vehicles can be used for two purposes: to develop the work or to securitize its use or exploitation. With the amendment to the regulations, sustainable infrastructure works can be developed self sufficiently without government intervention.
Direct access to trading platforms and the rise from 5% to 8% of the tax on mutual funds are some of the changes proposed by the bill.
The draft of the new bill, proposed by the National Council for Market Development, will be subject to public consultation with the stock market and financial sector from now until January 31, 2014.
The new law, which would replace the current Regulatory Securities Market Act contemplates major changes, such as increasing the tax rate paid by mutual funds to 8%, a greater integration with the international market and better trading platforms with direct access for investors.
In the last 11 months, 4 projects have netted $37 million using this mechanism.
Municipalities and schools are some of the entities that have used, successfully, sales of bonds backed by income streams, in order to finance their projects.
This has been revealed from data from the Salvadoran Stock Exchange which announced that to date, more than $37 million has been raised using this method of financing.
Despite the international financial crisis, assets have grown by 8% in 2010 and the number of investors increased 10% to 33.432 customer accounts.
Among other options, stock funds won over many investors reappearing as an investment option with over 200 investors. Also open Growth Funds increased 12%, Megafunds with an 11% increase and Money Markets with 12%.
Institutional investors will have the opportunity to diversify portfolios so far composed of government paper.
Investing in public securities will give pension funds operators better returns for their clients, since these projects typically offer additional profits.
Regulations on public investment securities, for projects over $ 3,600 million, expect to assist in funding such projects.
Costa Rica still faces obstacles to implement this mechanism, regarded as the best alternative for funding public works.
Public works securitization is once again being discussed, as the upcoming Tourism Minister stated it will be used to fund a new National Conventions Center.
The procedure to do this for the Conventions Center was already started and even approved by the Comptroller, but it hit a wall against the securities authority (Sugeval). Sugeval did not authorize this mechanism for raising capital, arguing there are risks when investing in securities which depend on cash flows generated by future real estate.
Although recent public opinion has focused on what went wrong with securitization, it is important to recognize the many benefits associated with sound securitization.
Global Financial Stability Report (GFSR), October 2009 - Chapter 2
Key points:
Sound securitization provides important benefits—to allocate credit more efficiently, transfer credit risk away from banking sector to more diversified investors, and more finely tailor risks and returns to potential end investors.